Chinese inflation slows to five-year low

MarkMagnier

BEIJING--Consumer prices rose in November at their slowest pace in five years amid lower global commodity prices and weaker demand in the world's second-largest economy, providing more latitude for the central bank to ease monetary policy as growth momentum slips.

November was the third consecutive month that inflation remained below 2%, well under the government's 2014 consumer inflation benchmark of 3.5%.

But a combination of slower increases in food costs, lower energy prices and still-healthy wage growth promises to put more money in the pockets of average Chinese.

"Falling inflation is really positive for households," said Julian Evans-Pritchard, an economist with Capital Economics. "The question is what they do with that money, whether they spend or save it."

In reaction to November's weaker-than-expected inflation data, the value of the yuan fell modestly in morning trading Wednesday while the Shanghai Composite Index briefly lost ground then recovered, and was up 0.4% midday. On Tuesday it fell 5.4%, the steepest drop in five years.

Analysts said the weak November inflation data could lead to another interest-rate reduction--following the surprise Nov. 21 cut in China's benchmark lending rate to 5.6% from 6%--or a reduction in the amount of capital that financial institutions are required to keep on reserve with the central bank.

"It is necessary to step up measures to boost the economy and we can expect more easing policies like another rate cut," said Liu Dongliang, an analyst with China Merchants Bank. "But the data will weigh on the yuan."

According to China's National Bureau of Statistics, the consumer-price index rose 1.4% year-over-year in November. That was below market expectations of a 1.6% gain, which would have matched October's level.

Producer prices fell 2.7% during the month, the statistics agency said Wednesday, for the 33rd consecutive month of decline, highlighting lower global prices for commodities such as energy, ferrous metals and chemicals as well as excess capacity in many Chinese industries. Oil prices recently fell to their lowest level since 2010 after a meeting of the Organization of the Petroleum Exporting Countries agreed to maintain production despite a soft market.

"We view deflation as a significant risk facing the economy as growth is expected to slow further in the coming quarters," ANZ said in a research note.

Food costs rose 2.3% compared with a 2.5% rise in October, retail energy costs fell 8.3% in November compared with a 4.9% decline in October, while pork prices--a significant part of the consumer inflation index--fell 3.8% compared with October's 3.1% decline, the statistics agency said Wednesday.

According to Premise, a database that tracks food prices, the cost to Chinese consumers of vegetables, meat, seafood and dairy products all declined over the past 30 days, led by processed meat prices, while fruit, grains and nuts and sweets prices rose.

"On the whole, I think prices are pretty manageable," said Bai Songyuan, a 73-year-old retiree, out shopping for vegetables.

Average wages in China are expected to increase by close to 10% this year in a low inflation environment compared with gross domestic product growth of around 7.5%, giving families more purchasing power and a larger share of national income.

"Falling food prices are a big deal in China because income per capita is so low," said research company High Frequency Economics in a report. "A big share of incomes is spent on eating, and even a small slowdown in food prices means a big percentage increase in household spending on other goods and services."

China's economy grew at 7.3% year-over-year in the third quarter, its slowest pace in five years, as some economists estimate that economic growth in 2014 might fall short of its 7.5% target.

China's policy makers opened a key meeting Tuesday to set economic targets for the coming year, although they're not expected to announce the results until March. Lower price pressure gives the leadership more room to liberalize energy and other prices still subject to state control, a legacy of China's planned-economy days.

"The lower inflation pressure gives them a window to push ahead on these [price] reforms," said Macquarie Securities economist Larry Hu.

Liyan Qi contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com, William Kazer at william.kazer@wsj.com and Richard Silk at richard.silk@wsj.com

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